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Why Apple's Dominance in China Has Only Just Begun

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Technology research firm IDC recently calculated that Apple (NASDAQ: AAPL  ) picked up one percentage point of market share in China. Apple now controls 7% of the market in China, which seems fairly insignificant, especially when compared to its closest competitors.

For example, Samsung (NASDAQOTH: SSNLF  ) holds the leadership status in China, with 19% market share. Samsung has a well-entrenched business in China, and due to its device offerings that reach across both the high-end and low-end price points, it seems like Apple would have a difficult time with market penetration.

However, investors should read beyond the seemingly insignificant level of Apple's current market share to understand its future potential. Apple is already growing rapidly in China, and going forward, its booming business opportunity there is just getting started.

Apple's next great frontier
Apple's business in China is growing rapidly and is quickly getting close to its largest geographies in terms of net sales. For many years, Apple's Americas and Europe segments were far and away its two-biggest regions. Recently, however, China has closed that gap thanks to outsized growth.

Apple's net sales in China grew 13% in fiscal 2013 to more than $25 billion. Growth in China far outpaced growth in the Americas and Europe, which clocked in at 9% and 4%, respectively. In the fiscal 2014 first quarter, the difference was even more striking.

According to Apple's most recent 10-Q, its net sales in China soared 29% to $8.8 billion. Sales in Europe rose just 5%, while sales in the Americas actually fell by 1%. It should come as no surprise that highly developed economies such as North America and Europe would lag, since the smartphone industry in these regions is fairly saturated. As a result, emerging economies are critical for Apple, which already derives 63% of its sales from international operations.

Apple specifically attributes new product launches in China as reasons for such out-performance, and considering its recent major deal, the groundwork is laid for that spectacular growth to continue.

An even greater opportunity in China
Apple has already realized considerable growth in China, and that doesn't include the future potential from its newly formed partnership with China Mobile (NYSE: CHL  ) . In many respects, China represents Apple's next major growth opportunity. That's because it's really only scratched the surface there. Apple only recently began offering its products through China Mobile, which is the largest telecom carrier in China with more than 760 million customers.

The tantalizing potential of adding this many users is huge, not just in terms of device sales but also the benefits of incorporating these customers into Apple's payments and other services platforms. This stands to boost Apple's business in China even further, which was already growing rapidly before the deal with China Mobile.

After announcing the partnership with China Mobile, Apple Chief Executive Tim Cook described China as an "extremely important market for Apple." Judging by the company's success there, it's abundantly clear that China truly represents the next major frontier for Apple. Apple sold more iPhones in China last quarter than ever before, and the agreement with China Mobile will only further Apple's growth in the country.

Bank on growth in China
Apple may seemed to have leveled off in mature economies such as the United States and Europe, which could call its growth potential into question. However, it's important for investors to keep their eyes on Apple's next major growth opportunity: China. In terms of growth, Apple is already hugely successful in China, as it's nearly as important a geography as Europe.

However, Apple's growth in China is really just beginning. Until recently, Apple's devices and services weren't available to the 760 million China Mobile customers. Adding those users into Apple's ecosystem only strengthens Apple's growth potential in China, which represents an enormous opportunity in the years ahead. When Apple sealed the deal with China Mobile, CEO Tim Cook called it a watershed moment. In short order, investors will realize why.

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Read/Post Comments (4) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 26, 2014, at 12:59 AM, singaporenick wrote:

    Nothing new in this article,which even then has to pad itself out with endless repetitions.

    It would be nice if Motley Fool could get some original content or ideas into itsa rticles.

  • Report this Comment On February 26, 2014, at 10:08 PM, twolf2919 wrote:

    Thanks for repeating the obvious...over and over and over....

    You do realize that most of those 760m China Mobile customers will never be able to afford an iPhone, right? Only about 140m have 3G (i.e. they have enough money to pay for "data" and, therefore, are the only potential iPhone customers). If Apple captures 10% of these (which would be above its national average, using your numbers), that comes to only about 14m new customers.

  • Report this Comment On February 27, 2014, at 12:16 AM, GaryDMN wrote:

    Many China Mobile customers will be upgrading to 4G and I'd imagine good percentage of the millions of current iPhone users, that bought their iPhones somewhere else and were limited to slow EDGE sub-Mb speeds, will have immediate effect on China Mobile's overall customer base's usage of broadband.

  • Report this Comment On February 27, 2014, at 12:49 AM, WineHouse wrote:

    Every iPhone / iPad customer in China is worth -- what? 2, 3, 4, 5 ? -- alternate-smartphone-manufacturer's customers in terms of net profits, since the Apple devices have a significantly higher profit margin on average than the other manufacturers. It used to be that profits mattered. Now, analysts seem to downgrade profits wherever possible, and for whatever reason. One of my stocks was recently pooh-poohed by an analyst because the 28% YOY increase in profit (net income) was in part due to higher YOY profit margin per unit product. I'm sure others are similarly pooh-poohed. Yet companies that have yet to turn a profit but have "appeal" (sort of like investment eye-candy, or tulips) have huge market cap valuations.

    So long as a company manages to remain true to itself, and profits exceed the pace of inflation YOY, and dividend payout YOY grows in parallel to profits, a company is well worth consideration as a long term investment. A "moat" adds significantly to the appeal (and brand loyalty is as much a "moat" for Apple as it is for Coca-Cola).


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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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